In a new development that threatens to further erode public trust and support for the eRate, technology giant IBM Corp. has accused eRate officials of unfairly targeting the company in their effort to rid the program of waste, fraud, and abuse. The eRate is the $2.25 billion-a-year federal program that provides telecommunications discounts to schools and libraries.

Earlier this year, the Schools and Libraries Division (SLD) of the Universal Service Administrative Co. denied more than $710 million in eRate applications for Funding Year 2002 that listed IBM as the primary service provider, because those applications allegedly violated the program’s competitive-bidding requirements.

But in appeals filed recently with the Federal Communications Commission (FCC), IBM claims these applications were singled out and held to a higher standard than others during the evaluation process.

Sources familiar with the program say at least some of IBM’s appeals appear to have technical merit. But that’s only part of the story. Most of the experts who spoke with eSchool News agree that although IBM might not have broken any of the program’s explicit rules in these instances, the company almost assuredly has violated the spirit of the rules. Resolving the mess will be a challenge for FCC and SLD officials, they say.

Most of those who spoke with eSchool News insisted on anonymity. “We don’t want to be targeted by the SLD,” one source explained. “We’ve got enough troubles of our own without getting into this, too.”

One who didn’t mind being identified was Bob Williams, senior writer for the Center of Public Integrity, who said he is not surprised by IBM’s allegations that its applications were held to a higher standard of evaluation than others.

The Universal Service Administrative Co. “is run by phone companies, and IBM is not a phone company,” Williams said, suggesting that the SLD’s motives might have been at least somewhat political in nature.

Part of the problem, Williams said, is that the SLD conducts its business without any records. “The [agency’s] audits and investigations are being done without public record and scrutiny,” he said.

The controversy is not good news for schools. With Congress stepping up its probe into the wasteful practices allegedly occurring within the eRate, fallout from the controversy threatens to shake the foundation of the six-year-old program. And eRate supporters say it will take a revision of the program’s rules–and clear direction from the FCC as to what constitutes a competitive-bidding violation–to save the eRate from critics who are only too eager to pounce.

‘Arbitrary’ ruling

In an appeal filed by IBM in June on behalf of the Winston-Salem/Forsyth County School District (WSSD) in North Carolina–which had more than $17 million worth of IBM-related funding requests denied earlier this year–IBM argued that the SLD’s treatment of WSSD’s application was “arbitrary and capricious.”

According to IBM’s appeal, the SLD told the district it denied WSSD’s application because WSSD “did not identify the specific services sought–either clearly on the [Form] 470 or in the [district’s Request for Proposals]–to encourage full competition on major new initiatives.”

IBM describes this reasoning as flawed. The company contends that the language WSSD used on its Form 470 to describe the services it was requesting is identical to that of other applications approved in the same year, such as the Houston Independent School District’s. In fact, IBM’s appeal points out that in many areas, both applications use the exact wording provided on the SLD’s eligible services list.

IBM also argues that the SLD funded some applications, such as one from the Los Angeles Unified School District, even though they used less-specific language to indicate the services requested than did WSSD’s application. The only difference, the company contends, was that these other applications didn’t list IBM as a service provider.

These instances “epitomize arbitrary and capricious decision-making. SLD has violated fundamental principles of fairness and administrative procedure, which the [FCC] cannot permit,” the appeal said. It urges the FCC to reverse the SLD’s decision “to protect WSSD’s right to rational and even-handed treatment by the SLD.”

Copies of these districts’ Form 470s, obtained by eSchool News, appear to support IBM’s allegations. For example, WSSD requested “wiring (Cat3, Cat5, coax, fiber, conduit, wiring accessories)” for “126 buildings” as a “Service or Function” in Block 10 of its 2002 Form 470; that same year, Houston ISD requested “wiring (Cat3, Cat5, coax, fiber, conduit, wiring accessories)” for “350 buildings” on the same section of the form.

IBM’s appeal goes on to say that the SLD’s denial of WSSD’s application is “inconsistent with the [FCC’s] established rules … regarding the level of specificity required in Form 470s.”

The FCC established the Form 470 posting procedure to provide a “minimally burdensome means” for schools and libraries to alert potential service providers of their needs and thereby ensure a fair and open bidding process, IBM notes. In fact, the FCC requires applicants to provide “only general information” about the services for which they seek eRate discounts.

By imposing a new standard for how specific a Form 470 must be in mid-stream, IBM argues, the SLD has exceeded its authority and usurped the rulemaking powers reserved for the FCC.

SLD spokesman Mel Blackwell also declined to comment on the allegations, except to say that IBM’s appeals show the process works.

“If [an applicant] disagrees with what we have to say, [the applicant] can go to the FCC. That’s how the process is, and it’s obviously working,” Blackwell said.

‘Unconscionable’ practices

The denial of more than $700 million in IBM-related applications came after the SLD issued a warning in December about what it perceived as a “pattern” of alleged competitive-bidding violations, as reflected in applicants’ Form 470s. The agency warned applicants to make sure they complied with the eRate’s rules seeking fair and open competition for services.

The two-step eRate application process requires schools and libraries to post their Form 470 applications–which list all new services the applicant is seeking–to the SLD’s web site for a period of 28 days before signing any contracts for these services. This gives vendors a chance to submit bids on the services in question, and it gives applicants the ability to select the most cost-effective proposal.

In its Dec. 3 statement, the SLD indicated that it “has determined that a sizable number of Funding Year 2002 applications associated with a particular service provider are not consistent with [FCC] regulations governing the” eRate. The agency later identified IBM as the service provider in question.

In listing the “patterns and practices” it had identified as suspicious, the SLD included the following warning:

“Any FCC Form(s) 470 … must define the specific services or functions (and quantity and/or capacity) for which funding will be sought, and applicants must obtain specific cost information, including prices for products and services to be provided. Applicants are required to choose the most cost-effective alternative, with price being the single most heavily weighted factor. … By not being specific about the services sought and not seeking prices for those services, selecting a service provider through this type of FCC Form 470 … violates the requirement to choose the most cost-effective provider.”

eRate insiders told eSchool News they believe the SLD suspected IBM of approaching high-discount school districts and offering to help them secure equipment through the eRate. IBM would help the districts with their applications, and in return, these districts–after the obligatory 28-day posting and bidding period–would agree to purchase IBM equipment.

Although this practice, if true, would seem to violate the spirit of the eRate’s competitive-bidding rules, sources familiar with the program say it would be difficult to prove that IBM–or any other service provider engaging in such behavior–had violated the explicit letter of the rules, provided that applicants still post their Form 470 for 28 days before signing a contract and at least “entertain” other bids, if any are received.

eSchool News tried to reach the contact person listed on WSSD’s eRate application, Gaff Pearce, for information about the district’s procurement process but was told Pearce retired at the end of the last school year. District officials did not put an eSchool News reporter in touch with someone else who could comment before press time.

IBM isn’t the only company suspected of this practice, but its vastly disproportionate share of eRate business makes the company an easy target, sources say. An analysis compiled by eRate consulting firm Funds for Learning shows that IBM has had by far the most funding requests ($2.159 billion) of any company in the past three years; the next-closest company is Bell South, at $211 million–or roughly 10 percent of IBM’s total funding requests.

The SLD’s rejection of $710 million in IBM-related applications this year also came as Congress and others were stepping up their scrutiny of the eRate.

Last fall, a report from the FCC’s Office of Inspector General said there were at least 26 federal or state investigations in progress involving the questionable use of some $200 million in eRate funds. Because of a lack of funds for program monitoring, investigators said they were unable to give “any level of assurance that the program is protected from fraud, waste, and abuse.”

The Inspector General’s report led the Center for Public Integrity (CPI) in January to call the eRate “honeycombed with fraud and financial shenanigans.” The CPI’s conclusions, in turn, have prompted United States Reps. Billy Tauzin, R-La., and James Greenwood, R-Pa., to launch a congressional investigation into the program. (See “Lawmakers query FCC about ‘troubling’ eRate abuse,” http://www.eschoolnews.com/news/showStory.cfm?ArticleID=4304.)

Sources who are familiar with the eRate told eSchool News they believe the SLD–feeling enormous pressure to crack down on alleged eRate abuses, but lacking either solid evidence of their suspicions or a sound technical reason on which to act–might have tried to manufacture a reason to deny millions in IBM-related applications.

One source suggested that the SLD found IBM’s alleged practices “unconscionable” and therefore “found a way to deny IBM-related applications.” Another source said, “There are some concerns– when the SLD gets into deciding what is a good bid document and what’s not– that [the agency] may be overstepping [its] authority.”

Fear and uncertainty

Ironically, in an attempt to make the program fairer for participants, the SLD might have opened itself to further criticism–both by critics of the eRate in Congress and by program participants.

If the SLD loses this appeal, it will have “major egg on [its] face at a time when [it is] being investigated,” one source said. “The [House] Committee investigation is going to have a field day with this.”

Although eRate insiders who spoke with eSchool News said they believe what IBM and other companies are suspected of doing is wrong, they also are alarmed by what they view as the SLD’s sense that it can make up the rules as it goes along.

“If [SLD officials] have taken the stance that the end justifies the means, then that is an ominous sign coming out of the SLD,” one source said.

As Congress steps up its probe into the eRate, a 14-member task force appointed by the SLD is working on a final draft of recommendations for how to safeguard the program from abuse. The task force will submit its recommendations to the FCC, which is expected to make rules changes before the start of the next application cycle later this fall.

One suggestion being floated by some observers is to reduce the maximum discount on internal connections to 70 percent, which would make schools and libraries responsible for at least 30 percent of the cost of services themselves. This would make participants less likely to abuse the program, proponents of the idea say, because schools and libraries would be more apt to apply only for the services they need and would carefully review competing bids

Regardless of what changes ultimately are made, eRate supporters agree the FCC and SLD need to improve the program’s competitive-bidding rules to make sure this type of situation doesn’t happen again. How well both agencies are able to accomplish this reform will go a long way toward defining the program’s future, they say.